Did you know that you would be a multimillionaire today if you had invested $ 100 in one of the better known cryptocurrencies 8 years ago? It is easy to say now, but the question that is increasingly being asked is what are cryptocurrencies and how do they work at all. Although cryptocurrencies have been around for almost 10 years, they are still new to us.

The biggest obstacle to understanding this whole system is ignorance of computer technology, but also terminology that is almost exclusively in English, such as the name of this technology - ICO (eng. Initial coin offering). But let's go in order.

What is a cryptocurrency?

The word "crypto" itself comes from the word "encryption" or encryption, which means a mathematical approach to information protection. Cryptocurrencies are digital records of certain values ​​stored in digital databases. Or, more simply, cryptocurrency is digital money, created in digital form as a means of digital exchange. They exist only on the Internet and are not issued, nor are they controlled by the central bank or the state. Precisely because they are not controlled by the central bank, they are not formally money.

Just as you have your money in a bank account, you also have your cryptocurrencies in your "digital wallet" on one of the websites that provide this service. Every transaction you make is a highly organized digital record, ie a file consisting of the amount of cryptocurrency units transferred and certain public and secret keys of the sender's and recipient's "digital wallets" addresses.

"Keys" are passwords that are more complex than the ones we use to access online accounts on a daily basis, such as email or other applications. Each transaction is signed by the sender with his private key, and at the end the transaction is confirmed and recorded in the network. No one on the network can see the private key, but they can see that the one who actually has the private key sent the transaction. The sender’s signature ensures that no one can compromise the content of the transaction. That is why it is important to keep private keys offline.

The difference between a cryptocurrency transaction and a credit / debit card

When you give your debit / credit card to a merchant, you give him access to the entire credit line, even if the transaction is done for a small amount of money. With credit cards, the store initiates the payment and withdraws a certain amount from the account.

Cryptocurrencies allow the holder to send exactly what he wants to the merchant or recipient without any additional information because cryptocurrencies do not require a name, but only a digital wallet code, or key. Therefore, there are no third parties, delays in payments or payment of fees.

What is a blockchain?

The main or public "book" in which all such transactions and value changes of cryptocurrency units are recorded is called a "blockchain". Each record is based on complex mathematical cryptography and is written in sequence, one block of codes after another, thus creating a chain of blocks. Therefore, it is not possible to change the data in the chain because the state of the data blocks on it is usurped.

Blockchain is not in one place. Everyone who owns a unit of a cryptocurrency has their own copy of the "blockchain book" which is synchronized among all computers on the network.

What is "mining" and who are the "miners"?

The entire "blockchain" system consists of computers connected to a network that confirm / verify certain transactions. "Miners" are persons (sometimes a set of people or business entities) who voluntarily provide their computers and computer processing of their "digital wallet" data in order to confirm a set of transactions carried out in the payment book, or "blockchain". They receive a certain amount of cryptocurrency units as a reward. Without miners, the blockchain system would not work easily. Mining is the process of confirming and adding new transactions to the blockchain.

Many people have gained real wealth by "mining" cryptocurrencies, but over time, the value of mining has diminished. Every four years, the mining premium is halved, so it is predicted that at some point in the future a completely new system, such as chips or processors, will be devised.

Unstable crypto market

Owning a unit of some cryptocurrency is about the same as owning some amount of gold. Gold can have a greater or lesser value, depending on changes in market value.

Bitcoin is the most famous and the first cryptocurrency created ten years ago. The value of one Bitcoin in 2010 was $ 0.003, and in May 2018, the price of that same one Bitcoin was over $ 9,000, however, as early as the summer of that year, the value dropped to $ 7,000, and continued to fall.

Investing in cryptocurrencies is most often associated with Bitcoin, the price of which is a general indicator of market movements, so it is sometimes called "digital gold". But today there are hundreds of other cryptocurrencies and new ones appear almost every day. Some survive and grow, some die out, but the growth of the crypto market is steady. Therefore, it is not surprising that more and more online stores offer payment in cryptocurrencies, and the owners of "digital wallets" want offers in which they can exchange their cryptocurrency units for products or services.

Not every cryptocurrency is equal nor is its system created equally. Thus, some are at the same time a cryptocurrency and a platform for the development of applications and startups, some do not use a blockchain system, the value of some grows rapidly, but also falls rapidly and the like. That is why it is important to be well informed and research all the details before making any investment in cryptocurrencies.

You can also monitor the unit values ​​of different cryptocurrencies on some websites that provide such services.